Investment review of 2020 – a year like no other

What about fixed income?

While we witnessed the continuation of the now familiar themes of consistently low interest rates and central bank support, bond markets weren’t completely immune to volatility. As expected in a period of market distress, credit spreads (the difference in yield between a government bond and a corporate bond of the same maturity) widened noticeably during the start of the pandemic, gradually narrowing over the remainder of the year as markets started to see light at the end of the tunnel. In terms of performance, it was generally a positive year for fixed income with the Bloomberg Barclays Global Aggregate Bond Index ending the year up 5.83%. It is important to remember the reasoning behind fixed income exposure in portfolios. The fixed income element of a portfolio should typically act as a dampener of volatility when other assets are plummeting. Our consistent focus on holding only very high quality government and corporate debt has allowed our bond assets to avoid these swings in value and provide respectable returns over the year.

How did other assets perform?

Other assets that hit the headlines included commercial property, gold and cryptocurrencies. Many commercial property funds spent large parts of the year suspended for trading due to the uncertainty in valuations, liquidity issues and the declining outlook of the retail, leisure and office sectors. These issues have received much media attention downplaying more positive aspects of this asset class, notably the performance of industrial, healthcare and specialist sectors of the property market. More astute property investment managers largely anticipated these pitfalls, accelerated by the pandemic, resulting in portfolios that are now well positioned to take advantage of a depressed market. 

It was a positive year for both gold and cryptocurrencies as investors looked for alternative assets. The speculative nature of these assets, particularly cryptocurrencies, continues to pose questions over their place in portfolios designed for long-term returns. We’ll be discussing these assets in more detail in our next Insight.

Was this the year to be an active fund manager?

The speed of market movements was particularly notable. In the US, the S&P 500 index fell by 33.79% in just 23 trading days from 19 February, subsequently growing by 45.09% in the following 53 trading days, going on to end the year up 18.40%.

Understandably, investors may interpret a year of such rapid changes as one that provides an argument for active investment management. It’s true that such fluctuations over such a short period can provide opportunities for a more active trading style. However, unfortunately it’s circumstances such as these that also highlight its shortcomings. With high conviction investing, the risks of misplaced conviction can be all too damaging; rapid market movements also reinforce the dangers of the notoriously tricky practice of attempting to accurately time ‘buy’ and ‘sell’ decisions.

It’s difficult to argue against staying invested through periods of volatility, 2020 emphasising just why trying to time markets in volatile periods can be more perilous than advantageous. Figure 2 highlights the points at which an investor in some of the major global stock markets over 2020 would have lost out on more than 2% of investment growth by not participating for just 2 days. When trading in and out of investments and making those active timing decisions, a period of 2 days or more out of the market is common. The chart shows just how frequently over 2020 such a period out of the market would have resulted in notable missed growth (up to 16%) and therefore, how fraught with danger timing decisions can be.

Figure 2: Two-Day Non-Market Participation Missed Growth (>2%) – Selected Global Equity Markets 2020

These events compound the message that extreme market volatility shouldn’t change an investor’s long-term objectives.

Tech stocks bucking the trend in a volatile market

The contribution of particular technology stocks was another prominent story. An equal investment across FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) would have returned investors 53.75% for the year. Tesla stock drew attention with growth of over 700% in 2020. Globally diversified portfolios have a large weighting to all of these stocks due to their size and benefitted from this. The risk of active, concentrated investment strategies was demonstrated again as although such a strategy focused on technology stocks would have performed well in 2020, many managers viewed these stocks as overvalued at the end of 2019 and subsequently underweighted exposure to some of the biggest contributors to return. Such risk wasn't present to the investor simply buying the whole market.

Investment themes to look out for: growth versus value stocks

This time last year, we commented that in 2020 we were entering another year of uncertainty; however, when doing so, we couldn’t have foreseen that one global event would render all others insignificant. A prediction of uncertainty was arguably a safe one given that this is inherent in investment. Considering this, we maintain our philosophy that well-diversified, low-cost portfolios provide the best risk-reward pay off in obtaining long-term returns, adding value through a strategic selection of markets and small tilts towards factors that can improve expected returns.

One such factor that has received increased attention of late is the value premium. The old argument of growth versus value stocks has been fairly one-sided over the last decade fuelled by the dominance of the large technology stocks and, as we have highlighted, this was no different in 2020. This is illustrated by the three-year rolling annualised return differences for value over growth stocks since December 1977 in Figure 3. Over the long-term, a premium for holding value stocks has tended to come through in global stock markets. However, as can be seen by the negative values in more recent history, growth stocks have been on a run of outperforming value stocks. With important valuation ratios now at their widest point between the two for many years and an increased appetite for value stocks at the back end of 2020, we’re keeping a close eye on this and other investment factors.

Figure 3: Rolling 3-year annualised return differences between MSCI World Value and MSCI World Growth Indices, December 1977 to December 2020

Final thought

2020 highlighted the importance of diversification and a steadfast approach. The far reaching implications of this global health crisis and the impact it’s had on our society and way of life won’t be forgotten quickly but for investors who stuck the course, the overall impact on the value their portfolios may well be.

Looking for more information?

If you would like to speak to one of our investment specialists, please contact Matthew Hodge or Seth Dowley in Buzzacott’s Financial Planning team. Alternatively, fill out the form below and we will be in touch shortly.

This article is prepared to keep readers abreast of current developments, but is not intended to be a comprehensive statement of law or current practice. Professional advice should be taken in light of your personal circumstances before any action is taken or refrained from. No liability is accepted for the opinions it contains, or for any errors or omissions. Buzzacott Financial Planning is the trading name of Buzzacott Financial Services Limited and is registered in England and Wales with registered number 1862661. Registered office is 130 Wood Street, London EC2V 6DL. Authorised and regulated by the Financial Conduct Authority.